GT you kinda lost me with that one if your talking about the fitting coming in from the transom/ jet, it's 1/2 all the fittings are stock from what I can see.
Sorry, I was in a stupid hurry. I edited what I wrote.
Is your engine stock from the factory? Or has the HP increased?
Being as the engine runs warmer running harder, it sounds like one of four possibilities.
One, the temperature gauge is wonky and not reading quite right. (sort of doubt this).
Two, the dump line is undersized for the amount of HP you have. (not likely unless you are making some respectable HP, like in the upper 500 range).
Three, the engine is full of sand and cannot cool effectively at the higher demand. (100% possible and happens often).
Four, the engine is running lean or the timing is extremely retarded (possible, but very easy to confirm).
Do you have any pictures of the set up?
And I do not think you need a bypass valve, but to each their own... The thermostat question has been covered here thousands of times and I really don;t want to go down that road again, but I will say that if you run a thermostat, get one like whats found on an I/O engine and run a block mounted automotive style water pump...
GT