Your mail settings in db.py should be:

mail.settings.server = 'smtp.webfaction.com <http://smtp.webfaction.com:25>' 
 
mail.settings.sender = 'an email address that you have created(in the 
webfaction panel->Emails->Email Addresses section)'
mail.settings.login = 'a_mailbox_name(created in webfaction 
panel->Emails->Mailboxes section):password_for_this_mailbox'

-- 
Resources:
- http://web2py.com
- http://web2py.com/book (Documentation)
- http://github.com/web2py/web2py (Source code)
- https://code.google.com/p/web2py/issues/list (Report Issues)
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