I like the IDEA of it, but I think it could be significantly improved.
It should be sorted and you could use the D-Pad or Arrow Keys to sort through categories of the items (by going left/right) like this maybe:
-Armor
-Weapons
-Potions/Food
-Magic
-Scrolls
-Powers
-Shouts
They would only show up as a category if you Favorited an item that would fit in that category (like how the inventory system does it)
It would also keep your last used category open for quick use.
-Edit: To clarify, You would still use Up to open favorites but it would open your last used Favorite Category, you could then proceed to use left/right to find the Favorite Category you want
or do you want it to be something different, if you want it a different way then explain