That looks like an actual hole in the carbody - I think I can see the prime mover inside. Considering the likely age and condition of #207 when this picture was taken, corrosion is probable. I see a patch in the sheet metal just in front (left) of the 3rd porthole/window. Also...look closely at the hole, and I think you'll see shadows that are consistent with the shadow cast by the entire unit.
Damage to the side of locomotives and cars from various flying debris was (and is) not uncommon - else there would not be a requirement in today's FRA regulations for safety glass in locomotive windows. I occasionally see requests for waivers of that requirement on the Federal Register, requested on behalf of tourist railroads and other low-speed rail operations.
Mark J
Columbia MO