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I would love an answer to this as well. I ultimately deleted it because I couldn't figure it out.

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Find the contact in the 'People' list; then:
If you want to delete the contact completely, choose the contact, click the menu & you'll find a delete button.
If you just want to delete the contact from your Favorites list, from the menu, click 'Edit, find the 'Group' drop-down, & uncheck 'Favorites'

Hope that's the info you were looking for
 
You can also go into your People app, and select the second icon along the bottom ("Groups"). Select the group you want, then hit Menu -> Edit group. Delete the people you don't want and save.