I've submitted a form and looked at the resulting email with the passwords you sent me.
It's all working fine.
In your webmail interface, you'll see several "View email as" buttons.
It defaults to the Text version, but if you click the HTML button, you can see your HTML template filled in correctly by FormMail.
You can tell FormMail not to include a plain text version in the email. If you don't want it, just add the NoPlain option to mail_options.
BTW, I recommend conforming to the XHTML standard. In particular, you should use double-quotes not single quotes in HTML tags.
id = 'mail_options'